By Asjylyn Loder

Bitcoin enthusiasts trying to launch funds that would bring the cryptocurrency to small investors have been rebuffed at least 10 times by Wall Street’s top regulator.

That hasn’t stopped them. There’s at least one application for a bitcoin exchange-traded fund still pending with the Securities and Exchange Commission, and more are planned, like one from cryptocurrency asset manager Bitwise Asset Management.

First advantage

Why keep pushing? History shows that the first fund to market has a huge advantage over later entrants, so firms are jockeying to keep their place in line in case regulators change their minds.

There is, of course, no shortage of opinions about what the SEC should do and what it will do. One central question concerns the basis of any SEC decision on cryptocurrency ETFs: Does the commission need to determine that cryptocurrencies are a worthwhile investment for individual investors, or should it be enough for fund firms to provide clear warnings about the risks?

Bitcoin is a virtual currency introduced 10 years ago as an alternative to government-issued money. Last year’s rally in bitcoin prices drew throngs of new investors, but prices tumbled by more than half this year, raising concerns about the volatility and potential manipulation of the opaque market. Mr. Rhind says that trading in physical markets for oil or gold is also largely unregulated, but that hasn’t prevented the SEC from approving ETFs based on those commodities.

“Is [the SEC] a merit regulator, or should investors be able to decide for themselves what to invest in?” says Paul Atkins, a former SEC commissioner and now chief executive of Patomak Global Partners, a financial consulting firm. Resolving that debate will take time, he says.

“That risk has always been a disclosure issue,” Mr. Rhind says. “But in this case, we had to go way beyond that and prove that the market is not being manipulated, which is a standard that is impossible to prove.”

The stakes are considerable. The $28.6 billion SPDR Gold Trust, the first (and still largest) ETF backed by gold bars, generates more than $100 million a year in investor fees.

Bitcoin is just the latest example of the $3.7 trillion U.S. ETF industry trying to bring an esoteric asset into the investing mainstream. For all the credit ETFs get for bringing low-cost index funds to the masses, the industry has also made betting on high-risk strategies as easy as buying blue-chip stocks.

For example, ETFs have popularized speculation on commodity futures and on derivatives tied to stock-market volatility, and some employ leverage to double or even triple gains and losses. But investors haven’t always understood the risks, and unexpected losses in some funds have led to Congressional hearings, lawsuits and multimillion-dollar fines.

Those controversies may explain some of the SEC’s caution when it comes to bitcoin. Also, Jay Clayton, the regulator’s chairman, has expressed skepticism about initial coin offerings, saying retail investors are particularly at risk in the once-hot market.

This month, the SEC temporarily suspended trading of two Stockholm-listed cryptocurrency exchange-traded products that had begun trading in U.S. over-the-counter markets.

The latest setbacks for ETF firms include three rejections in August and July’s unsuccessful appeal by Cameron and Tyler Winklevoss of an earlier SEC rejection. The Winklevoss twins first applied to launch a bitcoin ETF back in 2013. Their ETF would have backed investors’ cash with virtual stockpiles of the digital currency, akin to the way the SPDR Gold Trust is backed by vaults filled with stacks of gold bars.

The SEC wasn’t convinced. The commission rejected the Winklevoss proposal in March 2017, in part because of the difficulty of detecting manipulation in the largely unregulated markets where most bitcoin is traded.

Rekindled Fervor

But bitcoin ETF fervor was rekindled late last year after exchange firms CME Group Inc.and Cboe Global Markets Inc. launched bitcoin futures contracts. Fund firms such as First Trust, Direxion, ProShares and GraniteShares proposed ETFs that would invest in the nascent futures market instead of digital stockpiles of cryptocurrency. The hope was that a regulated bitcoin futures market would allay the SEC’s concerns.

ETF firms still see a glimmer of hope. At the behest of at least one commissioner, the SEC is reconsidering the three proposals that were turned down in August. The rejections hinged, in part, on a concern that the cryptocurrency futures markets are still too small. It’s a problem time may solve, if trading catches on.

History is not necessarily encouraging: The first ETF pegged to volatility futures launched five years after the debut of the futures, and the first oil ETF followed oil futures by 23 years.

For all the fuss, a bitcoin ETF is a bigger deal for bitcoin than it is for ETFs. It would lend legitimacy to a market that’s still on the margins of high finance. Wrapping cryptocurrency in an ETF could alleviate concerns about fraud, hacking and lost account keys that have made some would-be investors wary. Instead of creating a new account on one of the many bitcoin trading venues, investors could buy the ETF through their existing investment accounts.

“It’s an access vehicle,” says Elisabeth Kashner, director of ETF research at FactSet . “ETFs have taken certain trading tools and securities and made them more accessible to anyone with a couple hundred bucks and a brokerage account.”

Ms. Loder is a Wall Street Journal reporter in New York. She can be reached at asjylyn.loder@wsj.com. Dave Michaels contributed to this article.